On The Brink with Castle Island - Weekly Roundup 10/09/20 feat. Zachary Kelman (Square buys Bitcoin, effect of fees on DeFi, FinCEN files retrospective) (EP.136)

Episode Date: October 9, 2020

Matt and Nic cover deals and news of the week. Repeat guest Zachary Kelman joins the show to give his view of the FinCEN files and how the crypto industry should interpret the revelations. In this episode:  How fees affect DeFi liquidity and the price of ETH Braintrust raises $18m Bitnomial raises an $11m Series B Arthur Hayes and Sam Reed step down from their roles at 100x Despite everything, Bitmex is still operational BitMEX keeps processing withdrawals India's legislature turns hostile to Bitcoin Square buys $50m worth of BTC to hold on its balance sheet The difference in the rationale between Microstrategy and Square for their Bitcoin positions John MacAfee is arrested in Spain for tax evasion Ripple complains that the US is an unfavorable regulatory environment The latest on the Ripple class action suit The Chamber of Digital Commerce gives congresspeople $50 worth of USA-mined Bitcoin The DOJ publishes a Cryptocurrency Enforcement Framework Zach Kelman on how Bitcoin enthusiasts should be thinking about the FinCEN files Silvergate crosses $100b transacted through the SEN Content mentioned in this episode:  Peter Van Valkenburgh, There Is No Such Thing as a Decentralized Exchange Fidelity Digital Assets, The Role of Prime Brokerage in Digital Assets Nic on Medium, Public blockchain fee cyclicality and negative feedback loops Forbes, How Cathie Wood Beat Wall Street By Betting Tesla Is Worth More Than $1 Trillion  

Brought down by bad mortgage investments, Lehman, which has 25,000 employees, will be liquidated. The federal government loans American International Group, AIG, $85 billion. This is a different kind of market, and the Fed is asleep. The federal government is stepping it to stabilize Fannie Mae and Freddie Mac, the two mortgage giants that have been threatened by the housing crisis. The Bank of England has pumped 75 billion pounds more into Britain's ailing economy with a new round of Concentive Easing. You print a couple trillion dollars, and all of a sudden, people start to worry.

So out of this worry, we have something called a Bitcoin. Bitcoin. Welcome to On the Brinkum, Matt Walsh. And I'm Nick Carter. Crazy Newsweek. It's all kind of happening at the same time. A lot of stuff going on. A lot of stuff to get into.

Another publicly traded company buying Bitcoin. Jack Dorsey. What a guy. Who's next? We've got to start a pool on who's next to do it. Next publicly traded company. How about Twitter? Yeah, that would kind of stand.

to reason, I guess. I mean, it's kind of funny because, like, you know, the Pierre Richards of the world were, like, shaming Jack Dorsey for not holding Bitcoin on the balance sheet. And then he actually did it, which is only going to encourage them. I have to say, I was shocked. I cannot believe that that happened. It's actually happening a lot faster than I even imagined. And it's funny because all the critiques of micro strategy were like, oh, they're irrelevant, you know, they've had falling revenue for a decade. You know, they don't matter. And none of those critiques apply to Square, one of the fastest growing and most dynamic kind of fintech companies out there. It's really, it's so true. I mean, you have, you have like

crypto companies that don't even hold Bitcoin on their balance sheet and that we have two publicly traded companies that do. It's really breathtaking. And it's something like 2.5% of their net cash position. So it's a material amount. I saw a good tweet from Meltim saying the role of the CFO or the corporate treasurer really came into vogue in the 70s when there was high inflation. You know, the question is like if we get negative real rates to the tune of five or seven percent, is that role going to gain prominence once again? Yeah, no, it's a really good point. Well, we'll talk about that a little bit later on the podcast, but maybe before we get

into the news of the week, you had a couple good podcast this week as well as an article. So let's talk about the article first. You really called the top on some of this defy stuff. Yeah, I mean, I want to thump my chest a little bit because on a prior edition of this very show, October 2nd, I believe it came out, I said, hey, you know, I think the transaction fees are going to act as a break

on the defy system. And I think that's going to put pressure on the price of ETH because ETH is the reserve asset in DFI. So if the leverage in DFI on wines, that puts a lot of pressure on DFI. ETH itself, and lo and behold, the top, the local top for ETH was, I think, the first of September. So it was pretty much called it to the day, not that we're in the business of making price calls, but that was one trend where I think it was very plausible that DFI would unwind.

Some of the leverage had built up was a little bit unsustainable. And I thought the fees would be the immediate trigger for that. It's hard to prove causality, of course, but I was pretty happy with that. and then I expanded that whole hypothesis into full-length article. One of the things, apart from just the fees, is just the market structure of how you actually get net new retail flows into defy. And that's just a, it's really difficult to get net new capital into that system right now, at least in my opinion.

Yeah, and defy is so complex that if you're new to crypto, I don't think you have much of a hope of getting onboard into defy. I think most defy users are crypto natives already. So you have a pretty small addressable audience there. You know, maybe a couple hundred thousand people max. Yeah, so you don't want to be in that forum trading against other experienced veterans. It's much better to trade against retail order flow. Yeah, but if every transaction requires an on-chain transaction, then it's a smaller set of people that are familiar with MetaMask.

Although MetaMask did say they have a million active users now. I saw that. That's a pretty key, key milestone to reach. Yeah, MetaMask is really core infrastructure there as it relates to engaging with these platforms. I'm kind of shocked that the year is 2020 and we're still kind of reliant on MetaMask. It's kind of astounding.

It really is. And so then you had two great podcasts this week. So our first central banker actually appeared on the podcast. Yeah, ex-Central banker, Mitchell Nicholson. Really interesting episode. He's caught the crypto bug. and left the bank of Canada, which kind of blows my mind. Yeah, it was a really interesting episode, actually,

just to hear the level of Bitcoin penetration within the Bank of Canada, which is maybe higher than you might expect. And then you had Mason Borda on earlier in the week. Yeah, basically I told Mason that his challenge was to convince me of the fact that security tokens were worthwhile. And I think he did a pretty good job, honestly. Yeah, Mason's a very eloquent guy, so it was great to have him on the podcast finally.

I'm surprised we hadn't had him. Yeah, we were way overdue for that one. All right, so let's move into the deal section here. So the first one of the week is an $18 million raised from Brain Trust. This is Adam Jackson's company. They are a talent marketplace, and they are backed by Acme, blockchain ventures, Amidiar Technology, Pantera, Multi-coin, Hashkey, Variant, and a number of others. So congrats to the Brain Trust team.

The next deal we have is Kofix, which is trying to produce a new Oracle solution for use in Defi. There is half a million dollars from Huobi's Defi Labs, Dragonfly, and Coinbase. The next one on the list is Bitnomial. This is a regulated Bitcoin derivatives platform. And we know what happens when you're an unregulated derivatives platform. Sometimes you get arrested. So it's good to have another regulated venue in the mix. So they raised an $11 million series B, led by electric capital, as well as jump capital. So congrats to the Bitnomer. meal team. Yeah, I think it just came out today that Arthur Hayes and Sam Reed were going to step down from their positions on the parent company of BitMex. I'd have to imagine that there's some

negotiated kind of surrender going on right now with Arthur Hayes. The interesting thing is that you know, BitMex is still operational. They're still processing withdrawals, the platform still working, which is kind of shocking to me, I guess. Well, I guess, the thing to keep in mind there is that as much as everyone is like, hey, these guys are guilty and who knows what the facts and circumstances are, there still is the presumption of innocence. And so I did find it interesting that it didn't seize the domain and just shut it down. But I guess that would have created chaos in and of itself. And you'd have had a lot of big hedge funds, actually, that probably would have had some

issues getting assets off the platform if the domain was down. I mean, the impressive thing is that they're still able to honor withdrawals, which, you know, had this either two or three or three out of four. It wasn't clear, multi-sig. So I don't know if they've rotated those keys now and it's a one-of-one single-sig. But they're still processing withdrawals. There have been a lot of withdrawals, but there's still a lot of funds on the platform. I was thinking about that multi-sig today. That must be a real kick. situation right now trying to get the multi-sig out of Arthur's hands, out of Sam's hands in transition. That's chaos. Yeah, but they'd never, they didn't miss a day. And I remember a blog post where Arthur said something preposterous, like a thousand straight days, they'd process those daily withdrawals with two of the three executives making that signature. And even despite, you know, one of the founders being arrested, they were able to keep it going.

So it speaks to the resilience of running a Bitcoin-only exchange, I guess. Well, someone's going to write a book about that for sure. I guess the final chapter is probably not written yet. Next up in deals, we have Propy, which is a blockchain-based real estate startup. They raised $1.2 million from Tim Draper and Michael Arrington. The next one on the list is Covalent, which is an Ethereum data analytics startup. They raised $3.1 million from Woodstock Fund, 1KX, and Mechanism Capital. And speaking of Tim Draper again, Tim Draper has led a $5 million series A into the Indian

Crypto Exchange, Unicoin. One of the interesting things about India is that apparently the environment is turning hostile, again, with regards to cryptocurrency. So there was the Supreme Court decision, which, effectively said banks can engage with crypto exchanges there last year. And it looks like the legislature in India has now kind of soured on the idea and is making the environment much more difficult to operate in. So a step back actually for crypto in India. Yeah, that's too bad. Certainly a market that is enormous and would benefit from the technology. Uno coin, not to be confused with one

coin. That's right. Very different. I was thinking of unique coin gold also to be confused with, which recently settled with the SEC. Yeah, a lot of coins, all of these names with coins and blockchains, they're all kind of taken at this point. Yeah. All right, so let's get into the big news of the week. Actually, there's a few big news items. So we talked about this at the outset. So Square has announced that they have purchased 4,709 bitcoins for a total. of $50 million. They will hold the asset on their balance sheet. This is the second big purchase in as many months from a publicly traded company following micro strategies, $450 million purchase. And in true square fashion, they sort of open sourced their whole process and they put out a

Bitcoin investment white paper so that other publicly traded companies can just look at this and follow suit. What did you think? Pretty amazing from Jack Dorsey. I mean, we knew he liked Bitcoin, but I'm so impressed that he was able to kind of convince. convince the relevant stakeholders at Square to put this asset on their balance sheet. You know, that's a real statement of intent. Square is one of the most kind of exciting, you know, fintechy startups out there. We're not even startups, just publicly traded companies at this point. Their growth from both the Bitcoin side of the business and the regular side of the business

has been astonishing in the last year. And people are comparing them to the largest commercial banks in the U.S. now as, you know, a real genuine and important financial services company in their own right. And now taking this bet on Bitcoin, who knows, we'll see if they add to the position. They had a lot of cash on their balance sheet. I think this is more symbolic than anything, as opposed to a micro strategy where it really was play for the future of the company. Here, it's a statement of intent from Jack.

And the rationale is interesting because the micro strategy rationale was around a dependable store of value and this really being a good investment. and Square is really talking more around economic empowerment and this being a global monetary system, it being a ubiquitous currency. So it's actually maybe a little bit of a different reason for purchasing Bitcoin. Yeah, I don't know if you noticed this or felt this was implied, but I think I know this is a little bit of a coded message in response to the Coinbase kind of scandal where Jack Dorsey is really explicitly saying, you know, this is part of our mandate. We believe this is our objective as a firm is to empower people.

And Square in fairness has always been a strongly kind of values driven firm. Square cash actually banks effectively a lot of unbanked people or underbanked. That might have been a subtle retort. I don't know exactly. I did find the white paper is interesting. You know, Jack is always trying to tread a path for others to follow. It's not the longest white paper. It doesn't have an investment case for Bitcoin.

It just says mechanically how they went about. doing this yeah and certainly they have their own custody platform that's that's interesting in of itself a lot of these brokerages will outsource custody yeah i guess it's easier if you already do bitcoin custody yeah i do wonder who's next some people were kicking around visa or or PayPal i don't know it could be a surprise there's probably just judging by the numbers you know five percent of americans or bitcoins there's probably a few public companies companies CEOs out there that are secret bitcoinsers. I'm embracing it. I love it. I can't believe it's happening. It's just, it's unbelievable. So John McAfee's riotous days of endorsing ICOs may be over.

Isn't it John McAfee? I think he's done with the ICOs. This might be it for him. It might be at the end of the road. So it turns out that McAfee has reportedly netted $23.1 million as part of these various ICO schemes over the years and has some high. profile tweets in which he says that he refuses to pay U.S. taxes. And that turns out to have been a bad idea. He was arrested in Spain this week and charged by the SEC with his role in these unregistered securities offerings. And it was on tax evasion that they ultimately got him, right? That's how they get everyone. That's how they got Capone. Yeah. The thing that gets me is the actually, like, if you look at the coins that he endorsed, they were pretty irrelevant ones. I mean, I'd never

heard of most of them. And I really doubt that he brought in that much value to them. I mean, I guess you could do the analysis now and look at the timing of his tweets and the price action. But I feel like he was able to extract a lot of the value that he was actually providing to these coins in the form of a short-term pump. Yeah, there was a there was a whole kind of list of ICOs in terms of credibility. And it seems like all of the ones that he chose to get involved with we're just the bottom of the barrel. Well, I think, yeah, it's an adverse selection problem. I mean, if you're going to John McAfee for an endorsement,

you're probably not the most salivorous project in the first place. Well, speaking about the SEC, let's talk about Ripple. Chris Larson, who's the executive chairman of Ripple, said at a conference this week that the company might move overseas because of the excessive regulation in the U.S. market. I'm not really sure what to make of this. I mean, there's obviously probably a lot happening behind the scenes here with the SEC and maybe there's some discussions around whether or not XRP is a security.

But I'm not really sure what moving outside the United States really accomplishes for you if you've already engaged in that selling to retail behavior, right? Like, I'm not really sure what moving overseas would do. And I mean, Ripple has benefited from such a permissive regulatory environment in the U.S., it's astonishing. The one brush they had with the law was paying a $700,000 settlement to FinCEN in 2015, I believe, and they had to do a little bit of monitoring. But there's been no securities regulation consequences for selling this effectively meritless

token to a global audience, but in particular U.S. audience of retail investors. they've liquidated something like $1.5 billion of XRP over the lifetime of that asset. So a really considerable amount. So on the face of it, you know, as an outsider looking into the situation, you'd say what exactly is the problem here? The regulators have allowed you to flourish here selling this token. So the only guess I have is that there's a lot going on behind the scenes there and that the regulator is pushing them heavily and potentially,

looking to settle. Who knows? Well, there's a class action lawsuit currently rumbling. It's been rumbling for a long time. But there was a motion to dismiss that was denied recently. So that might be related to it. I've also heard that, you know, securities like regulators will wait for those kind of private civil suits to resolve. And then depending on the resolution of that suit, they get involved. So it could be they're just waiting for that process to wrap up. The problem is, that it takes forever. And, you know, that means that they may not step in here for another couple of years. Yeah, so I'm sure we haven't heard the last of this story, but it doesn't seem like moving

outside the United States really addresses much. So we'll see what happens. Keeping things in the United States, the Chamber of Digital Commerce launched a program this week to give $50 worth of Bitcoin to members of Congress running for re-election. This is a cool idea. Yeah, and I think the, I think the spin on it is that all of the Bitcoin was mine in the U.S. specifically. So these are supposedly clean bitcoins that are made in the USA.

So, you know, these aren't any old Bitcoins. These are U.S. produced Bitcoins, really high-quality stuff. You know, those are not the cleanest Bitcoins. The cleanest Bitcoins are the ones that have been seized by U.S. regulator and resold because even if it's mined in the United States, who knows where the transaction fees came from? That's correct. This whole virgin coins thing never made sense to me because you got the fees. The only way to have truly virgin coins is to reject the fees. It's true. So I thought this was a cool idea. I think that the digital chamber is up to some

interesting stuff. It looked like Perienne was on Squawk Box this morning talking about this. So good for the industry, I'd say. I saw her on CNBC. I watch CNBC now. They got the coin metrics reference rate. So it's always, always fun to watch CMBC, see the CM index reference price pop up. So something that just hit a few hours ago is the DOJ came out with a cryptocurrency enforcement framework. And this is a really beefy document. It's over 50 pages. And I haven't read it in full yet. But to me, it signals that the DOJ and FinCEN is pretty laser focused on crypto, and they specifically reference defy as something that they're paying attention to. They talk about privacy coins. One thing that was interesting was that they said when they seized privacy

coins as part of an investigation, they don't liquidate them because they don't want them to go back in a circulation be used for bad things. So technically the DOJ has taken that supply offline. So if you are a privacy coin bull, you should hope that as many drug dealers get their Monero seized as possible because that's effective deflation in the supply. That's pretty bullish for the privacy coins, I suppose. The privacy coins where vendors are getting caught all the time.

Yeah. So I just want to kind of zoom out here for a second. I don't know how you read this report and just don't come away incredibly enthusiastic and bullish on this industry writ large. So the very first sentence of the DOJ report says cryptocurrency is a technology that could fundamentally transform how human beings interact and how we organize society. Like, how do you read that and just say the feds are going to crush this industry and they're going to turn everything off? I mean, this whole report is about how the government can kind of clamp down on. some of the more nefarious things that are happening, how they can put a framework in place to regulate the bad actors and actually allow the technology to thrive. So I think this is great.

You know, clearly they're pretty focused on doing their best to inhibit all illicit usage or cryptocurrency. I think it could definitely be perturbing if you're more privacy-focused. It's not that surprising ultimately that they're taking a really close eye here. and obviously BitMex is top of mind. I'm sure there's more coming down the pipe. They definitely talk about those other offshore exchanges that may have serviced U.S. customers. They say they're not exempt from scrutiny.

There's a lot in this report. They talk about FATIF as well. The concluding paragraph says something about rooting out criminals so cryptocurrency can reach its full transformative potential. That doesn't sound like the voice of a regulator that's trying to shut down the industry. Yeah, I was interesting. you read the first few pages. They describe

cryptocurrency in a way that's kind of faithful to the movement, which is more better than I've seen from a lot of regulators. So on that same topic, it's been a few weeks since the FinCEN files dropped, and the FinCEN files are a bunch of leaked SAR suspicious activity reports, like a whole bunch of leaked SARs.

The BuzzFeed actually did a lot of the reporting around. A lot of people in the Crypt industry were kind of using it to laugh at these banks that they'd written up SARs on certain classes of activity for prohibited behaviors and then, or criminal behavior even, but then failed to do anything about these clients. And so there was a lot of finger wagging and, hey, look, these big banks, everybody accuses crypto being a hotbed for money laundering. Look, these big banks do it as well. So that was the popular take I saw around this. I want to talk to Zachary Kelman about it because he's worked in compliance within those big banks. Now he is independent.

We've had him on the show before. I wanted to get his take on it, what it means for these big financial institutions, what it portends for regulators, and how crypto enthusiasts should be thinking about it. So here is Zachary Kelman. Zach Kelman, welcome back. It's a pleasure to have you on once again. It's my pleasure. So we're here to discuss the explosive FinCEN files. They got a little bit of coverage a few weeks ago. We're still kind of digesting all the leaks. In my view, these are some of the most impactful leaks along with the Panama Papers and the Paradise Papers. Not a lot came of those aside from some finger pointing. What do you think the scope and the consequences of the FinCENC files will be? Or is it kind of too early to tell? Well, if you're not a lot of

look at the Periscope in Panama Papers, what you have is offshore wealth held by wealthy people, whereas what you have with these leaks, with the FinCENCEN leaks are government documents. You have filings with FinCEN with the Department of Treasury. It's very interesting. It's very interesting. Do I think it'll have a big impact in the same way? I think it'll have a bigger impact, ultimately. And I'm kind of less concerned at this point with the information in it because I'm not,

really surprised by the information. It's more the response to it that I'm really curious so far. But I think maybe we should lay out what this information is a bit. Yeah. So what would you say the gist of the Fence and Files is to the extent that we've begun to digest it? What's kind of the substance of the matter? Well, there are these things called suspicious activity reports. And suspicious activity reports are basically the pinnacle of the compliance program. It's kind of what everything leads to in terms of what's called transaction monitoring at banks or other fraud and other things that trigger investigations at banks, AML in particular. So what would happen at a bank normally is you'd have some sort of internal alert triggering system

and it would generate alerts based on what's called suspicious activity, which is obviously this big term that just means whatever the algorithm in that, in that software decides it's suspicious. And someone who works in the bank sees that report, makes a decision based on it, it gets escalated up to the top, it goes to committees and groups within the compliance department, and they ultimately decide how to action it. What that means usually is, A, do we want to ignore it? you know, B, do we want to kind of ding the account or flag the account or put it on the account

in some way for the future and maybe increases a risk rating so we look closer at it? Or C, do we want to file a SAR? And if so, do we want to keep or the client or lose the client? And the SAR is a communication to FinCEN, the Department of Treasuries, the Information Collection Group, where they are meant to store and collect this information. It all came under the USA Patriot Act. All these laws kind of emerged then. And so this basically was BuzzFeed, working eventually in conjunction with some other journalists,

found got this story. Someone leaked to them over a thousand, over a couple thousand of these actual SARS that they'd collected. Apparently it started because BuzzFeed was getting information or soliciting information around that kind of Trump, Russia investigation. And they received this. this trove of SARS, started sorting through it and finding useful information. And, you know, in a nutshell, that's what it is.

Regarding the, I think it was FinCEN that put out a statement at some point saying it's unlawful to leak a SAR. What did you make of that? I mean, did you at any point think that BuzzFeed could be prosecuted for leaking these or publishing these leaks? No. I mean, it is, well, they have a First Amendment protection, but it is unlawful. to leak it, whoever leaked it, right? Technically they're right. It is unlawful to do that.

They're just the beneficiaries of the leaking, though, as opposed to being the direct leakers themselves. That's right. That's right. Yeah. That's right. So the big takeaway here, as far as I understood it, was there's a huge volume of SARS. Banks are filing these as kind of a, for lack of a better term, get out of jail-free card when they do happen to be banking certain insolubri characters and in many cases what the files revealed was that they would file the SAR for some genre of activity which was prohibited continue banking these entities and consider job done because they filed the SAR and nothing happened effectively. Yeah, that's what the commentary has been and I think that's reasonable. I'm not saying that's certainly the case. But yes, I don't think

that's an unreasonable interpretation. I think that takeaway is pretty fair. You know, and you can extrapolate on that a little bit and say, hey, maybe the purpose of this system is more about information collection than about prosecution. That being said, another take I've seen kind of across the board is look at all these banks. They knew this bad thing was happening and they didn't end the client relationship. And I'd caution a little bit against that because I think if the bank collects information on a client that turns out that it's a conviction of the client for something criminal for some kind of, you know, financial crime and that these proceeds might be the result of that financial crime, they, I think in most instances would terminate that

relationship because it required to terminate that relationship. So if you look at this as a kind of innocent until proven guilty standard, the banks aren't exactly required to terminate that relationship. So I've noticed there's been a lot of that response to it of, oh, no, look, the banks are facilitating money laundering. But when you're actually in the bank making this decision, it's not obvious that this is definitely money laundering. And, you know, if you read the, it's BuzzFeed that produced this and, you know, listen to their, you know, their discussion of it, their articles and everything. It's, it's like somewhere between a news article and a Netflix episode or something.

They're not, they're trying to make it very entertaining and explosive, but I don't, I don't think the, it's, it's necessarily an indictment of the banks, but it is a fair description of the system as a whole, that it's more about, um, information collection than is about prosecuting. Right. So I guess BuzzFeed had the sort of unenviable task of trying to get a mass market audience interested in leaks pertaining to financial enforcement. And so they went for the most Hollywood kind of interpretation, which is these evil large banks, which are pretty out of fashion right now, you know, facilitated money laundering and they all got away with a slap on the wrist

or virtually no charges whatsoever. And not only that, but they continued banking these clients even after filing reports, so sort of effectively admitting that they knew they were doing something wrong. That's kind of the popular interpretation and the one being promulgated by BuzzFeed. You're saying there's actually kind of more substance here. There's kind of a more interesting story or kind of a more salient takeaway, basically. Right. Yeah, I would say I've consumed a lot of news about this and a lot of different takes. The take I kind of see in general is something like, yeah, these banks are responsible for what happened.

They should have, you know, terminated the court. I mean, it's more like the banks called the police and, you know, continued facilitating this, right? But that's technically their right to do. This is not the same as calling the cops on a bad thing. It's informing the police of the suspicious thing. It's not quite the same thing. But, you know, the takes I've seen are kind of twofold. And again, these are not, you know, this is not Fed posting. This is like these are journalists and people in the crypto space and people who are kind of, you know, I don't want to say they're reflexively anti-bank, but they're trying to be a bit edgy.

You know, it's those kind of people. And, you know, their view is we need more enforcement. And then we need the banks should be responsible for this. FinCEN and the Treasury are underfunded and inundated with with these SARS and should be able to, you know, prosecute everybody behind it. You know, it's kind of like an eat the rich take on some level. And I don't think that the banks are responsible. But, but, you know, the point is more, you know, as we were saying, requiring the banks to divulge all this information creates this kind of panopticon where, you know, FinCEN has this. this deluge of information, which did get leaked ultimately.

So in this country, the attitude towards financial surveillance has gone from passive to active surveillance to actually instrumentalizing the bank sector as an enforcement arm of the state, which you're suggesting could be formalized, maybe in response to popular pressure resulting from these leaks. Is that kind of an accurate way to put it? Well, the last point maybe is, again, I'm not saying that's my view. It's just a little bit of a tinfoil hat view at this point. But again, the takes I'm seeing on it across the board are that. I'm not seeing takes of, you know, no one wants to defend the banks.

That's kind of the point. So the takes I'm seeing are from people, like I mentioned, Matt Taibi, who's a, you know, big bank investigator and journalist. And, you know, is very much involved in Occupy Wall Street and investigating what happened with the financial crisis. You know, and he's a very fair journalist, you know. And so his view is we need more money towards FinCent and to, you know, investigate these things more, right, or to be able to prosecute these, you know, people more. So, you know, I don't know that there's going to be a groundswell of support based on, you know, BuzzFeed's report on us.

I mean, frankly, I'd listened to their podcast and I read the articles from BuzzFeed and they're reporting on it, I would have preferred to just get access to their database and read it. Obviously, I understand why they didn't do that and allow that. But yeah, like I said, it sounds like they're trying to produce it like it's an episode of narcos or, you know, some kind of spy movie or something and make it really sexy and cool. But the job of a compliance officer is mostly boring. You're mostly sorting, you know, it's mostly needles in a haystack. And so they're looking at the final result of many hours of sorting and just the needles as if that's what people go through all the time. I heard them at one point they were saying something about how they had some sort of tacit assumption that the people managing the bank or, you know, everyone in all these departments or the investigators for the Treasury monitoring some of these banks must have known all the details and chose to ignore it.

And that's just not the case. It's the people in the banks that are doing this work don't know for certain everything that they're finding, right? So it's not a foregone conclusion. Reporters look at things as a foregone conclusion because they're not in a court of law. They're just reporting news and they want it to be salacious and interesting. And it's a court of public opinion, right? And so you see that all the time where journalists confuse court of public opinion with, you know, the truth. So they're wondering why the banks didn't also do that.

That's kind of how I read the coverage. One of the juxtapositions that's really sticking in my head right now is the Bitmex kind of indictment, which mentions Iranian users on the platform. And of course, Bitmex is looking at, the executives are looking at criminal charges for violations of the Bank Secrecy Act. Versus one of the revelations in the FinCin files was that standard chartered allowed Iranian clients the ability, apparently knowingly, to bypass sanctions. But, of course, there's no criminal charges in the latter case. I guess obviously standard charter chartered was filing those SARS. I mean, how do you react to this kind of juxtaposition? Yeah, in general, it seems it seems unfair. I mean, I don't recall

any major individuals going to jail for AML crimes from U.S. banks. And the volume that they're processing is massive. But like I said, it's their job is not to, you know, to actually catch and prosecute criminals. I think the, you know, the absence of an AML program and compliance at all with CFTC for Bitmex is kind of their focus on going after them. It's like they, they didn't comply. And if you read, the thing that actually leaves a worse taste in my mouth is if you read what the CFTC said, it's that it's unfair competition for Bitmex not to have to comply with these rules when, you know, well, who are they unfairly competing with? It's what, CME group? I mean, I guess the futures markets for crypto that they're unfairly competing with,

it's just hard to imagine that they're being unfair to them. I understand technically they are. The idea is, look, here are the rules. If you touch Americans or American soil or American customers, you have to play by our rules. I mean, legally speaking, they're on very solid ground. I mean, don't get me wrong. But if you just take a few steps back and look at it, I would assume if we consider financial markets to be a public good, which for a lot of people, it's probably a hard pill to swallow, but assuming that is the case,

that seems to be the theory behind financial regulation. The innovation that these companies are putting out is important. And so the extent to which a company is complying with the rules and still facilitating, like you've mentioned, Iran's sanctions violations, and another company is not complying with the rules and is also facilitating Iran's sanctions violations to whatever extent that is the case, it does feel unfair. So, Zach, you've worked in compliance. financial compliance for some of the largest banks. How do you expect that these revelations

actually change the way banks operate, if at all? I think in the immediate term, it won't. This is kind of how I see it potentially playing out. There will be no effect. You know, the journalists keep journaling about it and talking about it, especially if there's more news that comes out. And at some point, they'll probably have some congressional, senatorial hearings, dragged them out in front of them, and lambast them. If you look at 2008, and this is just my personal view, you had a lot of anger with the banks. We all know that. And it just got channeled into penalties for empty money laundering compliance failures from

USA Patriot Act violations, mostly problems stemming from their failure to deal with the new laws from the Patriot Act, and mostly non-US banks. So you didn't really see a lot of these coming after U.S. banks. I think they mentioned some of these in defense and files, a standard charter. and HSBC and whatnot. So you'll see some congressional hearings and senators will bring them in and, you know, the banks will sheepishly look at them and do their best PR to say, hey, you know, we were just complying with the rules.

And then maybe, you know, if there's bandwidth for it in the news media, they'll cover it and see if they can make it into a news story that brings a lot of people together because a lot of people don't like banks. The reaction I've seen so far in the crypto space, the predominant reaction has been, hey, look, you know, crypto or Bitcoin is always alleged to be this, you know, hive of scum and villainy and a hotbed of money laundering. But look, you know, we're turning the tables now and the banks do plenty of it too. And in fact, they actually get away with it more. And so kind of actually cheering the revelations. Is that short-sighted? I mean, should crypto enthusiasts be excited by these

revelations or is there kind of a deeper impact here that actually might be cause for concern if you're kind of a crypto enthusiast? Yes, I think that's short-sighted. I mean, I think it's just a hot take. People want to have this hot take that the banks are bad. We finally got them. I think that is kind of how most people go with this. But no, I think the issue is really that we've been moving this ball down this court for many, many years. And to the extent that we start saying, hey, these banks are bad, look what they got away with, rather than begging the question of, hey, why are banks required to review all their transactions and report everything that they find the suspicious to the government to begin with?

We're kind of going to end up begging the question about why aren't the banks prosecuting these people? Why aren't the banks embedding or why don't we just give Finnsend more money so that they can prosecute all that? I guess it's going to be good for these law enforcement goals, but bad for financial inclusions. And also, I guess the point I was trying to make earlier is what is the policy rationale for going after Bitnex? What's the policy rationale for, you know, FATF requiring VASPs and all these countries all over the world that force all these crypto companies to collect personal information on everybody? You know, that policy rationale becomes bolstered by this, hey, the banks are bad. They should be prosecuting everybody. they're getting away with this argument.

So I think by saying, you know, the banks are bad. Look at this. Cryptos clean. We're kind of falling into a trap, so to speak, and saying, hey, we're like the banks now. We also are compliant. When in reality, you know, some people should be advocating for privacy for saying, look, people have a right to freely transact with each other. Again, it's not saying that it's absolute freedom, you know, but I'm saying it should,

There is an interest, a right to that, that should be balanced against the interest of catching criminals and terrorists and preventing money laundering. Well, Zach, as always, we really appreciate your commentary on this. Thanks so much for coming back on the show. Okay, my pleasure. Always good to have Zach Kelman on the show, repeat guest. He's in the running for most frequent guest. Oh, yeah. I like how he used to work for the banks, and now he is working.

for crypto. It's great. So speaking of banks, did you see Silvergate announced that they had $100 billion in transfer volumes going through their Silvergate Exchange network? So that's quite a milestone. So this has been a settlement platform servicing a lot of the crypto market participants. It's been up and running since about 2017, I believe. So congratulations to Silvergate. Them and signature bank are really leading the way as it relates to banks that are engaged in banking cryptocurrency companies. Pretty astonishing for a brand new kind of settlement infrastructure. It's really Silvergate and Signature at this point that are competing for that market

opportunity. It'll be interesting to see with the OCC announcement if that opens up the doors for more of these larger banks to play. But certainly you'd think that Silvergate and Signature have a big head start. There was an interesting piece from Peter Van Valkenberg, who wrote an op-ed saying there's no such thing as a decentralized exchange. And he said decentralized exchange is more of a verb than a noun, which might seem like a pedantic point, but basically the point of the article is that you're talking about individuals entering into swaps with pools of liquidity.

They're not going to an exchange. There's no specific coordinator. We're just talking about smart contracts. And he's basically making the case that that is not an exchange in the traditional sense and probably should be. thought of, you know, as more of a kind of a bilateral kind of Craigslist style transaction. So it's maybe should be regulated in a different way. I guess the key question there with, I saw there was a little bit of a flare up on Twitter between Pomp and Hayden and some of the, the DFI folks talking about the points of centralization

and whether or not Uniswap would be sufficiently decentralized in the eyes of a regulator and things like that. So I guess the key point for all of these decentralized exchanges is where are those single points, those single choke points? You know, do they have a bank account? Do they have a CEO? Do they have VCs? It's really a case specific type of a thing. Yeah. And, you know, as far as Uniswap is concerned, Uniswap really is just a system of smart contracts that exists on Ethereum and allow people to pool assets and make swaps. That said, Uniswap has a token. They're venture backed. They're U.S. corporation as far as I can tell.

So Uniswop, the system is probably quite resilient now. The U.S. entity, that might not be the case. Another thing I read this week was Forbes magazine had a great profile piece on Ark Invest and Kathy Wood. And just talk about an explosive growth company that she's built over there. And really, obviously the reason why we bring it up in this. context is that she's been very early in the Bitcoin bet. And so the growth of Bitcoin is part of that story. I think they have something like north of 20 billion under management right now. And I think it was in the maybe 100 to 200 million in late 2016 when I first met them. So the

growth has been absolutely preposterous. Yeah, it really has been. So congratulations. to ARC-Invest. Another research piece that I found interesting this week was Fidelity Digital Assets put out a note on the role of prime brokers. And so you hear a lot about, it's almost a buzzword in crypto at this point around building a prime brokerage experience. But I thought that they did a really good job of deconstructing what the role of a prime broker is and how that relates to crypto assets and specifically with the market structure of crypto, talking about some of those prime services that are coming on board. So just a good, good thing to read if you're curious about what that buzzword means. Yeah, we've definitely heard it said a lot in crypto, but it's not

clear there are any true large-scale prime brokers in the industry at present. All right, so I think that's it for the week. We'll see what happens next week. Another eventful week. Maybe we'll have some more companies buying Bitcoin. Maybe we'll have some more enforcement actions. Things are getting crazy out there. All right, everyone. Have a great weekend. and